Willpower and compromise effect

Abstract

This paper provides a behavioral foundation for modeling willpower as a limited cognitive resource that bridges the standard utility maximization and Strotz models. Using the agent's ex ante preferences and ex post choices, we derive a representation that captures key behavioral traits of willpower‐constrained decision making. We use the model to study the pricing problem of a profit‐maximizing monopolist who faces consumers with limited willpower. We show that the optimal contract often consists of three alternatives and that the consumer's choices reflect a form of the “compromise effect,” which is induced endogenously.